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Canadian Tire Corporation Announces Innovative Strategic Business Partnership with Scotiabank and Reports Solid Q1 2014 Results

May 8, 2014

Canadian Tire Corporation enters into far-reaching agreement with Scotiabank that creates unprecedented opportunity for business growth. Scotiabank to acquire 20% equity interest of financial services business; agreement includes credit card funding facility of up to $2.25 billion• Consolidated revenue up 3.8% to $2.6 billion• Delivers solid results in Q1 despite late arrival of spring weather. Same store sales down 0.5% at Canadian Tire; up 6.4% at FGL Sports and 2.9% at Mark's • Consolidated net income up 3.6%; consolidated diluted EPS down 2.2% reflecting the impact of earnings attributable to public unitholders of CT REIT • Announces 14.3% increase in dividend, increased share purchase commitment under NCIB of additional $100 million and intention to pursue early retirement of a portion of its long-term debt

TORONTO, May 8, 2014 /CNW/ - Canadian Tire Corporation, Limited (TSX:CTC, TSX:CTC.a) released its Q1 2014 earnings and, earlier today, announced a wide-ranging business partnership that will drive growth for its retail and financial services businesses.

Financial Services Partner Announcement

Canadian Tire Corporation and Scotiabank announced a strategic partnership earlier today that will see Scotiabank acquire a 20% equity interest in Canadian Tire's financial services business for $500 million in cash. The agreement also includes a credit card funding facility whereby Scotiabank will provide Canadian Tire's financial services business with credit card receivable financing of up to $2.25 billion satisfying the original objective of mitigating future funding risk. In addition, the partnership includes the option for Canadian Tire to sell an additional 29% of its financial services business to Scotiabank within 10 years.

"The agreement is unprecedented in the opportunity it creates for business growth and benefits for customers across our retail network," said Stephen Wetmore, Chief Executive Officer, Canadian Tire Corporation. "With Scotiabank's great brand and a shared focus on community, this partnership will serve as a basis for continued innovation that we believe will drive additional traffic to our Canadian Tire, Mark's and Sport Chek stores and provides new opportunities to reward loyal customers."

The Company and Scotiabank have agreed to work together on opportunities that enhance customer affinity for their brands, maximize sponsorship commitments and showcase a wide range of products and services offered by both organizations.

The deal is subject to customary closing conditions and regulatory approvals, and the transaction is expected to close by September 30, 2014.

Q1 2014 Earnings

First quarter results for the period ended March 29, 2014, show positive sales, revenue and margin growth.

"We saw the momentum from a very positive 2013 carry into the first two months of the quarter, and we are strongly positioned for the balance of the year," said Stephen Wetmore, CEO, Canadian Tire Corporation. "Early in the new year, the 2014 Olympic Winter Games presented an opportunity for Canadian Tire, Sport Chek and Sports Experts to increase customer affinity for the retail brands through new marketing initiatives. The results of the campaigns and customer feedback have been tremendous and were reflected in sales of Olympic-related merchandise."

Consolidated revenue increased 3.8% or $93.3 million in the quarter as a result of higher shipments in key categories at Canadian Tire, strong sales at FGL Sports and Mark's, increased gasoline prices and higher non-gasoline sales at Petroleum and increased credit card charges related to gross average receivables growth at Financial Services. Consolidated retail sales in the first quarter increased 1.2%, to $2.5 billion, over the same period last year.

Consolidated net income increased 3.6% to $75.6 million largely reflecting strong gross margin contributions from the Retail segment as well as solid revenue from accounts receivable in the Financial Services segment.  This was offset by a planned increase in selling, general and administrative expenses that included marketing and advertising expenses related to the Olympics and increased stock-based compensation expenses.  Diluted EPS attributable to owners of Canadian Tire Corporation were $0.88 in the quarter, down 2.2% over the prior year due to the impact of approximately $5.0 million, or $0.06 per share, for earnings attributable to the public unitholders of CT REIT (non-controlling interests).


Consolidated financial results1            
(C$ in millions, except per share amounts)   Q1 2014  Q1 2013   Change
Retail Sales2$2,460.5  $  2,431.2   1.2%
Revenue    2,573.1   2,479.8   3.8%
Net income  75.6   73.0   3.6%
Net income attributable to owners of Canadian Tire Corporation 70.6   73.0   (3.3)%
Basic earnings per share attributable to

owners of Canadian Tire Corporation3
 0.88   0.90   (1.8)%
Diluted earnings per share attributable to

owners of Canadian Tire Corporation3
 0.88   0.90   (2.2)%


1 Retail sales is a key operating performance measure and refers to the point of sale (i.e. cash register) value of all goods and services sold to retail customers at Canadian Tire Dealer-operated, Mark's and FGL Sports franchisee-operated, Petroleum retailer-operated and corporately-owned stores across the retail banners and through its online sales channels and, in aggregate, does not form part of the Company's consolidated financial statements.  Revenue, as reported in the Company's consolidated financial statements, is comprised, primarily of the sales of goods to Canadian Tire Associate Dealers and to franchisees of Mark's and FGL Sports, the sale of gasoline through Petroleum retailers, the sale of goods to retail customers by stores that are corporately-owned under the Mark's, PartSource and FGL Sports banners, the sale of services through the home services business, the sale of goods to customers through INA International Ltd., a business to business operation of FGL Sports, and through the Company's online sales channels, as well as revenue generated from interest, service charges, interchange and other fees and from insurance products sold to credit card holders in the Financial Services segment and rent paid by third-party tenants in the CT REIT segment.  Management believes that retail sales and related year-over-year comparisons provide meaningful information to investors and are expected and valued by them to help them assess the size and financial health of the retail network of stores; these measures also serve as an indicator of the strength of the Company's brand, which ultimately impacts its consolidated financial performance.  Refer to section 8.3 in the Company's Q1 2014 MD&A and section 10.3 in the full year 2013 MD&A for additional information.
2 Retail sales for the prior year have been restated.  Refer to section 8.3 in the Q1 2014 MD&A for additional information.
3 Earnings per share year-over-year amounts are calculated using whole numbers.


 

RETAIL SEGMENT OVERVIEW

Retail segment revenue increased 3.4% or $76.2 million to $2.3 billion in the quarter due to strong shipments at Canadian Tire and sales growth at FGL Sports, Petroleum and Mark's.

Income before income taxes in the Retail segment was $16.6 million in the quarter, down 28.2% over the prior year. This reflects the impact of the operations of CT REIT during the quarter including the payment of rent expense at market rates for properties acquired by CT REIT. The earnings also reflect strong gross margin performance across all retail businesses, which were offset by planned increases in marketing and advertising expenses due to Olympic and sport sponsorship activities and higher stock-based compensation expenses.

Canadian Tire achieved first quarter 2013 retail sales levels despite the late arrival of the spring selling season with same store sales down 0.5% compared to the same period last year. Strong sales in January and February were impacted late in the quarter by continued winter weather in March.

Petroleum sales were up 3.3% in the quarter largely related to higher gasoline prices and increased non-gasoline sales.

FGL Sports continued its strong performance with retail sales growth of 1.7% and an increase of 6.4% in same store sales compared to the prior year. Same store sales at Sport Chek, FGL Sports' core corporate banner, increased 11.9% in the first quarter, which also saw the opening of a new state-of-the-art flagship store in West Edmonton Mall. Sales gains were led by higher sales across all apparel categories and strong sales of hard goods as well as the positive customer response to Olympic performance and Team Canada hockey apparel supporting the Sochi Olympic Winter Games.

Mark's saw strong results early in the quarter with sales of winter-related apparel and footwear but the extended winter season led to softer sales through March. Despite the delayed start to the spring selling season, retail sales were up 2.7% and same store sales were higher by 2.9% compared to the same period in 2013. These increases were driven by strong sales of industrial apparel and footwear and men's apparel as the banner refocused on core areas of the business.

CT REIT OVERVIEW

CT REIT began to execute its growth plan with the closing of a third-party acquisition during its first quarter of 2014 and remains committed to a further seven projects that are expected to be completed through the remainder of the year. Earlier this week, CT REIT announced its intention to make a further four acquisitions and its plans for development of two smaller intensification projects.  Net operating income for the first quarter, including straight line rent and land lease expenses amounted to $58.0 million and funds from operations for the same period were $42.7 million or $0.238 per unit.

FINANCIAL SERVICES OVERVIEW

Financial Services continued its strong performance in the quarter. Income before income taxes was $82.2 million, an increase of 6.4% in the quarter compared to Q1 2013 due to higher revenue from gross average receivables and interest expense savings, partly offset by increased credit card net write-offs and incremental allowance.

Financial Services selling, general and administrative expenses increased 11.3% in the quarter compared to the prior year due primarily to a planned increase in marketing costs associated with account acquisition and volume related increases in credit card operations costs and increased personnel costs as a result of higher stock-based compensation expenses.

New account growth is due in part to the continued execution of initiatives that have integrated Financial Services into the retail environment as well as technology improvements in-store that have improved the overall customer experience. Processes within the store and point-of-sale enhancements now facilitate the awarding of instant credit for same day purchase.

CAPITAL EXPENDITURES

Capital expenditures for the first quarter were $74.0 million compared to prior year spending of $62.0 million.

QUARTERLY DIVIDEND

Canadian Tire Corporation has declared an increase in the quarterly dividend of 14.3% to $0.50 per share on each Common and Class A Non-Voting share. The dividend is payable September 1, 2014 to Common and Class A non-voting shareholders of record as of July 31, 2014. The dividend is considered an "eligible dividend" for tax purposes.

NORMAL COURSE ISSUER BID

During the first quarter of 2014, the Company purchased 311,319 Class A Non-Voting Shares under its normal course issuer bid program ("NCIB"). This includes 294,900 Class A Non-Voting Shares, which were purchased in addition to shares purchased for anti-dilutive purposes.

Canadian Tire announced today that it intends to utilize a further $100 million of its anticipated free cash flow in 2014, in addition to the $100 million previously announced on February 13, 2014 (for an aggregate of $200 million), for the purchase of additional Class A Non-Voting Shares under its NCIB. The Company intends to purchase such Class A Non-Voting Shares if, after consideration of various factors, the Company determines that the purchase would be expected to be in the best interests of the Company and contribute to enhancing the value of the remaining Class A Non-Voting Shares.  As previously announced, the Company will not purchase more than an aggregate of 2.5 million Class A Non-Voting Shares in 2014 pursuant to its NCIB.

Any purchases made by CTC pursuant to its NCIB may be made through the facilities of the TSX or alternative trading systems, if eligible, by open market transactions at the market price of the Class A Non-Voting Shares at the time of the acquisition or as otherwise permitted under the rules of the Toronto Stock Exchange ("TSX"). For open market transactions, CTC is subject to a daily repurchase restriction of 47,649 Class A Non-Voting Shares, which represents 25% of the average daily trading volume of the Class A Non-Voting Shares on the TSX for the six months ended January 31, 2014.  Additionally, CTC may also acquire Class A Non-Voting Shares under its NCIB through private agreements under an issuer bid exemption order issued by one or more securities regulatory authorities in accordance with applicable securities law and any TSX requirements. Any private purchase made under an exemption order issued by a securities regulatory authority will generally be at a discount to the prevailing market price of the Class A Non-Voting Shares.  Class A Non-Voting Shares acquired by CTC pursuant to its NCIB are restored to the status of authorized but unissued shares.

Please refer to Management's Discussion and Analysis for further detail and information on the following charts.


Retail segment financial results         
          
(C$ in millions)   Q1 2014  Q1 2013 Change
Retail sales1$2,460.5 $ 2,431.2 1.2%
          
Revenue $2,293.1 $ 2,216.9 3.4%
Gross margin dollars $656.3 $ 599.5 9.5%
Gross margin (% of revenue)  28.6%   27.0% 158bps
Selling, general and administrative expenses          
  (excluding depreciation & amortization)  598.9   486.3 23.2%
Other (expense) income  23.0   7.5 202.8%
EBITDA2$80.4 $ 120.7 (33.6)%
Depreciation and amortization  69.1   80.2 (13.8)%
Net finance (income) costs  (5.3)   17.5 (130.6)%
Income before income taxes $16.6 $ 23.0 (28.2)%
       
1 Retail sales for the prior year have been restated.  Refer to section 8.3 in the Q1 2014 MD&A for additional information.
2 Non-GAAP measure. Refer to non-GAAP measures in section 8.3 in the Q1 2014 MD&A for additional information.


 


Key operating performance measures1             
              
(year-over-year percentage change, C$ in millions,

except where noted)
 Q1 2014   Q1 2013   Change
Retail segment - total           
  Retail sales growth2 1.2%    0.9%    
  Revenue $2,293.1   $ 2,216.9   3.4%
Retail segment - by banner           
Canadian Tire           
  Retail sales growth  0.0%    (1.6)%    
  Same store sales growth  (0.5)%    (2.4)%    
  Sales per square foot $388  $ 386   0.7%
  Revenue $1,218.9  $ 1,174.3   3.8%
FGL Sports         
  Retail sales growth3 1.7%    5.7%    
  Same store sales growth3 6.4%    9.1%    
  Sales per square foot $282  $ 268   4.9%
  Revenue $379.4  $ 367.4   3.3%
Mark's         
  Retail sales growth  2.7%    1.6%    
  Same store sales growth  2.9%    1.5%    
  Sales per square foot $324  $ 311   4.4%
  Revenue $204.3  $ 194.1   5.3%
Petroleum           
  Gasoline volume growth in litres  0.0%    2.7%    
  Retail sales growth  3.3%    3.7%    
  Revenue $499.1  $ 485.5   2.8%
  Gross margin dollars $36.5  $ 33.1   10.4%
               
For financial definitions refer to section 8.3 in the Q1 2014 MD&A and section 7.4.1 in the full year 2013 MD&A for additional information.
Retail sales for the prior year have been restated.  Refer to section 8.3 in the Q1 2014 MD&A for additional information.
3  Retail sales and same store sales metrics for the prior year have been restated.  Refer to section 8.3 in the Q1 2014 MD&A for additional information.


 

CT REIT segment financial results            
             
(C$ in millions)  Q1 2014   Financial

Forecast
  Variance
Net operating income1$58.0 $ 57.4 $ 0.6
Funds from operations1 42.7   42.2   0.5
Adjusted funds from operations1 32.3   31.6   0.7
1  Non-GAAP measures.  Refer to section 8.3 in the Q1 2014 MD&A for additional information.
 
(C$ in millions)  Q1 2014   Financial

Forecast
  Variance
Property revenue $82.7 $ 83.2 $ (0.5)
Property expense  (17.9)   (18.8)   0.9
General and administrative expense  (1.9)   (2.0)   0.1
Interest income  0.2   -   0.2
Interest and other financing charges  (20.4)   (20.1)   (0.3)
Fair value adjustment on investment properties  127.0   -   127.0
Net income $169.7 $ 42.2 $ 127.5


 


Financial Services segment financial results         
(C$ in millions)  Q1 2014  Q1 2013 Change
Gross average accounts receivable  $ 4,542.1  $  4,251.1 6.8%
Net credit card write-off rate  5.85%   6.17%  
Return on receivables1 7.31%   6.77%  
            
Revenue    $ 264.6  $  250.0 5.8%
Gross margin dollars  150.4   139.8 7.6%
Selling, general and administrative expenses  70.0   62.9 11.3%
Income before income taxes  $ 82.2  $  77.3 6.4%


Key operating performance measure.  Refer to section 8.3 in the Q1 2014 MD&A and section 10.3 in the full year 2013 MD&A for additional information.



To view a PDF version of Canadian Tire Corporation's full fourth quarter and year-end earnings report please see: http://files.newswire.ca/116/Q12014MDAFSandNotes.pdf


FORWARD-LOOKING STATEMENTS

This document contains forward-looking information that reflects management's current expectations related to matters such as future financial performance and operating results of the Company. Forward-looking statements are provided for the purposes of providing information about management's current expectations and plans and allowing investors and others to get a better understanding of our financial position, results of operations and operating environment. Readers are cautioned that such information may not be appropriate for other circumstances.

All statements other than statements of historical facts included in this document may constitute forward-looking information, including but not limited to, statements concerning CT REIT's proposed acquisition plans under the heading "CT Real Estate Investment Trust", statements regarding the Company's normal course issuer bid program (including statements regarding the Company's expectations about the amount of its anticipated free cash flow to be utilized in acquiring Class A Non-Voting Shares pursuant to its normal course issuer bid) under the heading "Normal Course Issuer Bid", statements regarding the expected benefits of the strategic partnership with Scotiabank, such as the mitigation of future funding risk, increased financial flexibility, maintenance of the integration between the Company's financial services and retail businesses, enhanced customer affinity for Canadian Tire brands and maximization of sponsorship commitments under the heading "Financial Services Partner Announcement", and other statements concerning management's expectations relating to possible or assumed future prospects and results, our strategic goals and priorities, our actions and the results of those actions and the economic and business outlook for us. Often but not always, forward-looking information can be identified by the use of forward-looking terminology such as "may", "will", "expect", "believe", "estimate", "plan", "could", "should", "would", "outlook", "forecast", "anticipate", "foresee", "continue" or the negative of these terms or variations of them or similar terminology. Forward-looking information is based on the reasonable assumptions, estimates, analyses, beliefs and opinions of management made in light of its experience and perception of trends, current conditions and expected developments, as well as other factors that management believes to be relevant and reasonable at the date that such information is provided.

By its very nature, forward-looking information requires us to make assumptions and is subject to inherent risks and uncertainties, which give rise to the possibility that the Company's assumptions, estimates, analyses, beliefs and opinions may not be correct and that the Company's expectations and plans will not be achieved. Examples of management's beliefs, which may prove to be incorrect include, but are not limited to, beliefs about the effectiveness of certain performance measures, beliefs about current and future competitive conditions and the Company's position in the competitive environment, beliefs about the Company's core capabilities and beliefs regarding the availability of sufficient liquidity to meet the Company's contractual obligations. Although the Company believes that the forward-looking information in this document is based on information, assumptions and beliefs which are current, reasonable and complete, this information is necessarily subject to a number of factors that could cause actual results to differ materially from management's expectations and plans as set forth in such forward-looking information for a variety of reasons. Some of the factors - many of which are beyond our control and the effects of which can be difficult to predict - include (a) credit, market, currency, operational, liquidity and funding risks, including changes in economic conditions, interest rates or tax rates; (b) the ability of CTC to attract and retain high quality employees for all of its businesses, Dealers, Canadian Tire Petroleum agents and Mark's Work Wearhouse and FGL Sports franchisees, as well as our financial arrangements with such parties; (c) the growth of certain business categories and market segments and the willingness of customers to shop at our stores or acquire our financial products and services; (d) our margins and sales and those of our competitors; (e) the changing consumer preferences toward e-commerce, online retailing and the introduction of new technologies; (f) risks and uncertainties relating to information management, technology, property management and development, supply chain, product safety, changes in law, regulation, competition, seasonality, weather patterns, commodity price and business disruption, our relationships with suppliers, manufacturers, partners and other third parties, changes to existing accounting pronouncements, the risk of damage to the reputation of brands promoted by CTC and the cost of store network expansion and retrofits; (g) our capital structure, funding strategy, cost management programs and share price; and (h) the possibility that the anticipated benefits and synergies from the partnership with Scotiabank cannot be realized or may take longer to realize than expected. We caution that the foregoing list of important factors and assumptions is not exhaustive and other factors could also adversely affect our results. Investors and other readers are urged to consider the foregoing risks, uncertainties, factors and assumptions carefully in evaluating the forward-looking information and are cautioned not to place undue reliance on such forward-looking information.

For more information on the risks, uncertainties and assumptions that could cause the Company's actual results to differ from current expectations, please refer to the "Risk Factors" section of our Annual Information Form for fiscal 2013 and our 2013 Management's Discussion and Analysis, as well as the Company's other public filings, available at www.sedar.com and at www.corp.canadiantire.ca.

Statements that include forward-looking information do not take into account the effect that transactions or non-recurring or other special items announced or occurring after the statements are made have on the Company's business. For example, they do not include the effect of any dispositions, acquisitions, asset write-downs or other charges announced or occurring after such statements are made.

The forward-looking statements and information contained herein are based on certain factors and assumptions as of the date hereof. The Company does not undertake to update any forward-looking information, whether written or oral, that may be made from time to time by it or on its behalf, to reflect new information, future events or otherwise, unless required by applicable securities laws.

CONFERENCE CALL

Canadian Tire will conduct a conference call to discuss information included in this news release and related matters at 12:00 p.m. ET on May 8, 2014. The conference call will be available simultaneously and in its entirety to all interested investors and the news media through a webcast at http://corp.canadiantire.ca/EN/investors, and will be available through replay at this website for 12 months.

About Canadian Tire Corporation

Canadian Tire Corporation, Limited, (TSX:CTC.A) (TSX:CTC) or "CTC," is a family of businesses that includes a retail segment, a financial services division, CT REIT and Canadian Tire Jumpstart Charities, CTC's affiliated national charity that is dedicated to removing financial barriers so kids across Canada can participate in sports and physical activities. Our retail business is led by Canadian Tire, which was founded in 1922 and provides Canadians with products for life in Canada across its Living, Playing, Fixing, Automotive and Seasonal categories. PartSource and Gas+ are key parts of the Canadian Tire network. The retail segment also includes Mark's, a leading source for casual and industrial wear, and FGL Sports (Sport Chek, Hockey Experts, Sports Experts, National Sports, Intersport, Pro Hockey Life and Atmosphere), which offers the best active wear brands. The nearly 1,700 retail and gasoline outlets are supported and strengthened by our Financial Services division and the tens of thousands of people employed across the Company. For more information, visit Corp.CanadianTire.ca.






SOURCE CANADIAN TIRE CORPORATION, LIMITED

PDF available at: http://stream1.newswire.ca/media/2014/05/08/20140508_C7275_DOC_EN_40089.pdf


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